Pension Schemes Will Now Give Higher Income: Inflation Based Pension Products Coming Soon
If you were always wondering whether or not you will ever be able to buy a a pension product that will give you higher regular income, then god has smiled upon you, or maybe it’s the Insurance Regulatory and Development Authority of India.
To come up with guidelines for a floating rate annuity product, a group has been formed by IRDAI, said its chairman, Subhash Khuntia. He announced this on January 29 at the 17th Annual Summit of Insurance Brokers Association of India (IBAI), while speaking during a virtual press conference.
The cost of living goes down when the overall interest rates falls, and when the rate goes up, so does the cost of living. To be linked to a benchmark such as G-Sec or an inflation index, IRDAI is planning to introduce a floating rate annuity option. As inflation is rising, so is cost of living, this type of product will come in handy.
Benefits of such a product :-
Going through multiple cycles of ups and downs, interest rates changes with time. As an indicator for interest rate movement, if we take the fixed deposit (FD) rate offered by the State Bank of India (SBI), then during the last decade the variation has been huge. The highest FD rate ranged between 5.4% and 9.25%.
Funds are locked in for longer period and often for life, in an annuity investment. Life Insurance companies in order to give a guaranteed fixed income which can be sustained over a long period like 20 to 30 years, go for the lower side, it being the most conservative rate.
On a majority of annuity products, the best interest rate has been less than 6%. This is less and the primary reason as to why investors are uninterested in annuity products in India.
There have been multiple instances in the economy when increase in interest rate is so high that there is a vast difference between the general interest rate of fixed income products and the annuity rate. On the other hand, it is the fixed and lower rate of annuity which often prevents investors from getting compensated for high inflation when general interest in the economy is higher.
Abridging The Gap:-
This is exactly when, a pension product which is linked with an inflation-index can be instrumental. This is because, the flexible pension commitment based on market rate will allow insurers to offer a higher rate to investors. An annuity product which is linked to benchmark like G-sec or CPI will be very useful in the context.
This will leave higher regular income in the hands of annuitants, when the inflation increases, eventually abridging the gap between wish and ability. By that we mean, those who are looking for variable annuities with better rates and those investors who find no such option in annuity products.